The CVA process is something that we get asked about often here at Company Insolvency Advice. A Company Voluntary Arrangement (CVA) is a legally binding agreement between a financially distressed company and its creditors. It allows the business to restructure its debts and repay them over an agreed period while continuing to trade. CVAs can provide struggling businesses with a viable alternative to liquidation, enabling them to regain financial stability without closing their doors.
A CVA is a formal insolvency procedure governed by the Insolvency Act 1986. It is typically used by businesses that have temporary financial difficulties but are still fundamentally viable. If successful, a CVA can protect a company from legal action, reduce creditor pressure, and allow directors to retain control. In this article, we will explore the CVA process in detail, outlining its benefits, eligibility criteria, key steps, and potential pitfalls.
What is a Company Voluntary Arrangement (CVA)?
A Company Voluntary Arrangement (CVA) is a structured repayment plan designed to help businesses struggling with unmanageable debt. It enables a company to negotiate lower monthly repayments with creditors, often including a partial write-off of debts, while continuing operations.
The process is overseen by a licensed insolvency practitioner (IP), who works with the company’s directors to assess financial viability and propose a fair repayment structure. Unlike administration or liquidation, a CVA allows the company to avoid total closure and maintain relationships with customers and suppliers.
Creditors must approve the CVA proposal before it takes effect. Once approved, the company makes agreed payments over a fixed period (usually between 3 to 5 years). If the business adheres to the terms, any remaining unsecured debt may be written off at the end of the arrangement.
Key Benefits of a CVA
A CVA offers multiple advantages for businesses facing financial distress, making it an attractive option compared to administration or liquidation. Key benefits include:
- Business Continuity: Unlike liquidation, a CVA allows the company to keep trading while resolving financial difficulties. Employees can retain their jobs, and operations can continue without major disruption.
- Debt Repayment Flexibility: The repayment plan is tailored to the company’s cash flow, ensuring manageable monthly payments that do not overburden the business.
- Protection from Legal Action: Once a CVA is approved, creditors are legally bound by its terms. This means they cannot take enforcement action, such as issuing a winding-up petition or pursuing legal claims.
- Reduced Debt Liability: In many cases, creditors agree to write off a portion of the company’s debt, making full repayment more achievable.
- Lower Costs Compared to Administration or Liquidation: A CVA is more cost-effective than placing a company into administration or liquidation, making it a practical option for struggling businesses.
Who Can Apply for a CVA?
A CVA is suitable for companies that are struggling with debt but still have a viable business model. To qualify for a CVA, a company must:
- Be a registered limited company in the UK.
- Be insolvent or facing imminent insolvency, meaning it cannot pay debts as they fall due.
- Have predictable cash flow to support a structured repayment plan.
- Show that creditors will receive a better return through a CVA than they would through liquidation.
Small businesses, retailers, hospitality companies, and other firms experiencing temporary cash flow difficulties often benefit the most from a CVA. However, if a company has no realistic way of generating income, alternative insolvency solutions like administration or liquidation may be more appropriate.
The Step-by-Step CVA Process
A CVA process is very structured to ensure it meets legal requirements and gains creditor approval. The key steps in the CVA process include:
1. Assessing Financial Viability
The first stage involves a full financial assessment conducted by the company’s directors and an insolvency practitioner (IP). This includes reviewing:
- Outstanding debts and liabilities.
- Cash flow forecasts.
- Existing contracts and obligations.
- The company’s ability to generate sustainable income.
The insolvency practitioner determines whether a CVA is a viable solution or if other insolvency procedures should be considered. If the business lacks sufficient income to support a repayment plan, a CVA may not be the best option.
2. Drafting the CVA Proposal
If a CVA is deemed suitable, the insolvency practitioner prepares a formal proposal outlining:
- The total amount of debt.
- How much creditors will receive and over what period.
- Expected contributions from company revenue.
- Measures to improve financial stability.
The proposal must be fair and realistic, as creditors will assess whether the repayment terms provide a better outcome than alternative insolvency solutions.
3. Creditor Approval Process
Once the CVA proposal is finalised, it is submitted to all known creditors. A creditors’ meeting is arranged, where they review the terms and vote on whether to accept the proposal.
For the CVA to be approved, at least 75% (by debt value) of creditors who choose to vote must vote in favour. If approved, the CVA becomes legally binding on all unsecured creditors, including those who did not vote in favour.
4. Implementation of the CVA
Once approved, the company begins making agreed repayments under the supervision of the insolvency practitioner. These payments are typically made monthly and distributed among creditors as per the CVA terms.
The company must adhere to the agreed repayment schedule. Missing payments or breaching the terms can result in CVA failure, leading to potential liquidation.
5. Ongoing Compliance and Completion
The CVA remains in place for the agreed term (usually 3-5 years). During this period, the company must submit regular financial reports to ensure compliance. If the business successfully completes the CVA, any remaining unsecured debts included in the agreement may be legally written off.
What Happens if a CVA process Fails?
If a company is unable to meet the repayment terms outlined in the CVA, it can result in failure. When this happens, creditors regain the ability to take enforcement action, including issuing a winding-up petition. In many cases, failure to comply with the CVA terms leads to the company being forced into liquidation or administration, depending on the financial situation at the time.
Common Misconceptions About CVAs
There are several misunderstandings about the CVA process. Some believe that entering into a CVA signifies complete business failure, but this is not necessarily true. A CVA is a tool for restructuring debt while allowing a company to continue trading. Others assume that a CVA eliminates all debts, which is incorrect, as it primarily offers a structured repayment plan rather than total debt forgiveness.
Alternatives to a CVA
For businesses that do not qualify for a CVA, there are other insolvency solutions available. Pre-pack administration allows for the sale of company assets while reducing liabilities. Company administration provides temporary protection from creditors while a restructuring plan is developed. If a company is beyond rescue, creditors’ voluntary liquidation (CVL) may be the best option, leading to the formal closure of the business and the distribution of assets among creditors.
Get in Touch
If you have any additional questions about the CVA process, or you would like to speak to a member of our team, please contact us and we will be glad to assist.
